Post Retirement Products

Income Drawdown allows you to take lump sum out of your pension fund while the rest remains invested. A lot depends on the fund managers you choose and how well they perform.

In a nutshell your fund needs to produce growth so you can take an income so you don’t run out of money before you die.

You can also choose to buy a fixed-term annuity – which allows you to defer a decision on how you fund retirement. The length of the annuity is normally between 1 to 5 years which means they don’t run for the rest of your life.

There are also pension drawdown plans which offer underlying guarantees. This might guarantee to pay you for example 5 per cent of your pension fund per annum. The income level varies with your age and gets higher as you gt older.

If your pension fund grows above 5 per cent per annum you can also receive the potential extra gain.

Of course any guarantee will come with an extra cost.

Recently the pensions market is now offering a hybrid annuity-drawdown option.

You can buy an annuity that provides enough guaranteed income to cover your basic expenses, then invest the other 50 per cent into drawdown scheme to try to grow your retirement savings further.

Unfortunately these schemes are also less flexible and carry more costs.

Don’t overpay the taxman

You can only take 25 per cent of your pension fund whilst the remainder is taxed at your marginal rate.

After you have taken the first 25 per cent, you should withdraw your pension savings in small amounts over a number of years to avoid hitting a higher tax threshold.

Occasionally an investor might be prepared to pay extra tax, for example to get hold of your entire pot and use it to purchase a buy-to-let property.

Income Tax is something to bear in mind when you are deciding how much income to withdraw each year, you don’t really want to take that much income in a single year that you get pushed into a higher bracket.

Interest Rates

For people with a pension fund invested in retirement, it’s important to keep an eye on what’s going on with interest rates because expectations about them can move stock markets, and because of their impact on government and corporate bonds.

Bonds are commonly held in investment portfolios as a ‘safer’ alternative to shares, and as a way to diversify risk.

However, once central banks start to normalise policy and raise interest rates again, many investors could decide they overbought bonds and dump them in a hurry. Warnings have been sounded for years and despite occasional corrections bonds have remained popular so far, but a crash could well occur eventually.

If interest rates were to rise this would lead to better annuity deals and make them a more attractive option again.

Final Salary Pensions

It is rarely a good idea to move from a safe environment like a final salary pension into a drawdown plan.

The FCA have made it compulsory that any final salary pension which is worth more than £30,000, Independent Financial Advice must be taken.

In certain cases some people are happy giving up a comfortable final salary pension and investing in an income drawdown plan. This may be if they are single, and do not have to provide a spouse/or dependents pension. The death benefits can also be much bigger moving into drawdown which might be important for inheritance purposes.